CSSB Releases Its Draft Standards: One Step Closer To Mandatory Sustainability Reporting In Canada - Corporate Governance

On March 13, 2024, the Canadian Sustainability Standards Board (CSSB) published two exposure drafts for comment. CSDS 1 contains general requirements regarding sustainability-related financial information and CSDS 2 contains climate-related disclosure requirements.

For the moment, these drafts are almost identical to the standards issued by the International Sustainability Standard Board (ISSB) in June 2023, with the exception of certain additional relief to account for the Canadian context.

Once finalized, CSDS 1 and CSDS 2 will only be voluntary standards in Canada. That said, they will be an influential reference point for Canadian regulators deciding mandatory rules on sustainability-related disclosure.

Towards Mandatory Disclosure

The CSSB, formed in June 2023, has been working with the ISSB and various stakeholders (including private and public companies) to advance the adoption of sustainability disclosure standards in Canada.

The CSSB is now soliciting feedback on the proposed CSDS 1 and CSDS 2 and the 90-day consultation will be closely monitored by the Canadian Securities Administrators (CSA), as it is in the process of drafting a revised version of the first mandatory climate-related disclosure rule in Canada, a draft of which was initially released in 2021 (Proposed National Instrument 51-107 Disclosure of Climate-related Matters (NI 51-107)).

The CSA has indicated it will consider the finalized CSSB standards and possibly further revise NI 51-107 in response, subject to any modifications appropriate for Canadian capital markets. Notably, the CSA's work is currently only focused on climate-related disclosure and does not encompass broader sustainability considerations.

Where it All Started

On June 26, 2023, the ISSB released its inaugural standards with the goal of establishing a global baseline for sustainability-related (IFRS S1) and climate-related (IFRS S2) financial disclosure. The ISSB standards fully incorporate the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and consolidate the requirements of multiple other leading sustainability reporting frameworks. As a result, the ISSB standards set out comprehensive reporting requirements which, for many companies, will require considerable thought and resources to implement.

Alignment with the ISSB Standards

Like the ISSB standards, the proposed CSSB standards require entities to disclose information regarding sustainability-related (CSDS 1) and climate-related (CSDS 2) risks and opportunities that are useful to investors, lenders and other creditors in making their decisions and which could reasonably be expected to affect the entity's cash flows, its access to finance or cost of capital over the short, medium or long term.

Both the ISSB standards and the proposed CSSB standards require disclosure in the areas of governance, strategy, climate-related risks and opportunities, business model and value chain, strategy and decision-making, financial position, financial performance and cash flows, climate resilience, and climate-related metrics and targets.

As the effects of climate change continue to become more extreme, investors are growing more discerning when it comes to climate-related financial disclosure. While some investors are seeking increased consistency in climate-related financial disclosure to allow them to make sustainability-based investment decisions, others are recognizing the scale of climate-related financial risks that businesses are (or will in the future) face. The movement towards adopting climate-related disclosure standards is to ensure all types of investors are able to understand and compare climate-related actions and risks across companies.

Deviations from the ISSB Standards

The deviations proposed from the ISSB standards to adapt the proposed CSDS 1 and CSDS 2 to the Canadian context are very limited. Rather than adopting a carve out approach – which has been criticized by certain actors at the international level – the CSSB opted for a relief approach.

Effective Date	The ISSB requires entities to apply its standards on or after January 1, 2024, whereas the CSSB is suggesting that its standards apply one year later, on or after January 1, 2025.
Nature of Disclosure	The ISSB provides that for the first year of application companies are allowed to focus only on climate-related disclosure (as opposed to the whole sustainability spectrum), while the CSSB extends this relief to a period of two years.
Comparative Information	The ISSB requires entities to disclose comparative information about their sustainability-related risks and opportunities (other than their climate-related risks and opportunities) in the second annual reporting period, while the CSSB extends this to the third annual reporting period.
Scope 3 Emissions	Transition relief has also been extended for disclosure of Scope 3 emissions by one additional year to allow entities in Canada more time to prepare for adoption. This additional relief is in response to concerns raised by companies regarding the uncertainty of measuring Scope 3 emissions, along with challenges related to processes and capacity to deliver Scope 3 disclosure concurrently with their financial disclosure.

As part of its consultation process, the CSSB is asking if additional relief should be given with respect to disclosure of indirect (i.e., value chain) greenhouse gas emissions (Scope 3 emissions), climate resilience disclosure, sustainability reporting beyond climate, and the requirement to provide sustainability disclosure at the same time as related financial statements.

Although the proposed deviations of CSDS 1 and CSDS 2 from the ISSB standards currently appear minor, the CSSB has left the door open to additional amendments to reflect Canada-specific circumstances, notably to address the rights of First Nation, Métis and Inuit Peoples. A consultation is tentatively scheduled to begin in late 2024 to ensure Indigenous Peoples are involved in the development of the CSSB standards.

The CSSB has also indicated that it could issue interpretative guidance in the future.

Global View on the ISSB Standards

Similar to Canada, other jurisdictions have also been working on tailoring the ISSB standards to suit their own particular circumstances.

For example, the UK and Australia have each proposed their own rules based on the ISSB standards which are currently under consultation. Singapore is mandating reporting for public companies in accordance with the ISSB's climate reporting standards starting from 2025, while in Brazil, the ISSB standards will be incorporated into its framework effective January 1, 2026. Mexico is currently in the process of preparing its own ISSB standards rules, and has already advised businesses to begin incorporating such standards into their processes, and Japan's own draft rules based on the ISSB standards are expected to come out by the end March 2024.

In contrast, the European Union developed its own European Sustainability Reporting Standards in July 2023, but worked with the ISSB to ensure interoperability between its European Sustainability Reporting Standards (ESRS) and the ISSB standards.

Other jurisdictions like the US and China have moved away from the ISSB standards and implemented their own sustainability-related disclosure regimes. Notably, the final rules released by the US Securities and Exchange Commission (SEC) on March 6, 2024 do not mandate the disclosure of indirect greenhouse gas emissions attributable to a company's value chain (Scope 3 emissions).

Impact of Future Disclosure

The CSSB intends to finalize its proposed CSDS 1 and CSDS 2 by the end of 2024.

Once finalized, we expect that many large organizations will choose to apply in whole or in part the voluntary standards to improve their sustainability profile while others will wait for the CSA to issue its mandatory rules.

All in all, organizations will need to rethink their approach to sustainability-related disclosure and may need to implement more robust processes not only to report on the required data points, but to also institute the mechanisms needed to collect the relevant data in the first place. We could see a shift in the content and quality of sustainability-related disclosure published by such Canadian companies, a trend we have been continually analyzing as demonstrated by our 2024 ESG Disclosure Study.

For now, however, CSDS 1 and CSDS 2 remain in draft form and subject to further revisions. Comments are due by June 10, 2024, and we will continue to monitor this space and provide updates as developments arise.

Special Thanks to Nivi Srinivasan for her help with this Bulletin.